Gold prices are going through the roof once again with each burst of boom seeing the yellow metal scale a new high.
The world might have abandoned gold standard but the Indian middle class continues to buy for social reasons. It is this practice more than anything else that explains the relentless gold rush in India.
Drain on forex reservesDecried as wasteful and constituting a drain on our precious and scarce foreign exchange — gold is the second largest item on the Indian import basket — gold has serendipitously placed India in an enviable position with a conservative stock of 15,000 tonnes valued at roughly $480 billion that can hasten our growth if not catapult us into the ivy league of rich nations.
Gold standard may not be in vogue and not many are pining for its return but there are intelligent governments and central banks that are seeing the writing on the wall and building their war chests like never before.
China, for example, realised its mistake in putting all its eggs in one basket — the US dollar — and is now making amends by investing its fresh forex accretions in the yellow metal.
Our government has a much easier job on hand. It has to hard-sell its gold bond scheme so that the huge gold pile strewn across the country is put to better use and the drain on our precious forex resources is staunched.
Apart from checking the drain from forex reserves, popularising the gold bond scheme would inculcate the habit of holding gold in paper.In fact, a nation’s stock of gold should remain in official vaults. Therefore, besides popularising gold bond scheme for those sitting on gold, for the wannabe gold owners, exchange traded gold must be the norm.
Given the fact that rural folks swear by gold, this won’t be an easy task unless they are won over by explaining the danger of keeping their precious possession meant for the rainy day in their houses.
Paper gold must be sufficiently publicised and the services of the ubiquitous post offices roped in to sell them at the doorsteps of consumers.
Land has also been perceived as a safe-haven asset. The Chinese government and Indian entrepreneurs have been acquiring land abroad considered favourable for cultivation of crops not possible back home due to climatic and soil deficiencies or disadvantages. But any huge land acquisition by foreigners is bound to be resented by the locals. Industrial metals no doubt are precious but they don’t lend themselves to easy storage as gold does.
Besides, the scientific community can come up with substitutes. Shares briefly held themselves out as a safe haven asset which explained a rash of Sovereign Wealth Funds (SWF) before realisation dawned that they are not. In the event, gold remains the only safe haven asset for both individuals and governments.
In the event, gold remains the only safe haven asset for both individuals and governments.Crime for gold
In the hands of individuals, though, it is an unsafe safe-haven asset. Indeed, gold-related crimes figure high in the pecking order of crimes committed universally.
But this is no major handicap if only individuals are sold on the idea of investing in paper gold whose value keeps pace with its underlying asset.
While the fear factor can be played upon to effect transfer of gold from households to government lockers, promoting paper gold in lieu of jewellery may be a harder task. Paper gold might give safety and returns but not the glitter of the real thing.
The income-tax law does its bit towards promotion of paper gold by sparing it from wealth tax while imposing tax on gold per se. In capital gains tax, once again paper gold emerges trumps.
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